Bank of Canada Governor Tiff Macklem said the Bank can continue to “look through” the direct inflation impact of higher oil prices only while those pressures remain contained, drawing a clearer line around when the Middle East energy shock could require a policy response. Speaking to the Halifax Partnership in Halifax on September 21, Macklem said CPI inflation has been around 3% in recent months, largely because of higher fuel costs, and would be expected to edge higher if oil stays near $100 per barrel. Under normal circumstances, a 10% oil-price increase adds about 0.2 percentage points to CPI inflation, but damaged refining capacity has amplified the current shock by pushing gasoline and diesel prices higher than crude alone would imply. So far, however, the Bank has seen limited evidence that those costs are spreading broadly across other goods and services.
The complication is that Canada simultaneously faces a growth shock from renewed US trade tensions. Macklem said the latest tariffs directly affect about 5% of Canadian goods exports to the US, but the larger risk comes from uncertainty delaying business investment and hiring. If the tariffs persist, the Bank estimates fourth-quarter growth could be roughly halved to below 1%. Canada also continues to operate with “excess supply,” meaning renewed weakness could preserve economic slack and make it harder for firms to pass higher costs through to consumers. The result is an unusually difficult policy mix: energy creates upside inflation risk while trade uncertainty pushes demand and growth in the opposite direction.
That leaves persistence and pass-through as the BoC’s real policy test. Macklem said policymakers must determine whether the effects prove “temporary or persistent”—whether energy simply lifts headline inflation for several months or begins producing broader and more durable price pressure. He stressed that the Bank does not want to raise rates unnecessarily if inflation pressures remain contained, but equally does not want to be “too slow to respond” if persistence builds. The message is therefore conditional rather than outright hawkish: $100 oil alone does not automatically require tighter policy, but the case for continuing to disregard the shock weakens substantially if higher energy costs begin spreading through the Canadian economy.
Key Takeaways
- BoC Governor Tiff Macklem said the Bank can continue to “look through” the direct inflation impact of higher oil prices only while broader pass-through remains limited.
- If oil stays near $100 per barrel, the BoC expects inflation to edge higher in coming months, with refinery disruptions amplifying the impact on gasoline and diesel prices.
- Canada is simultaneously facing weaker growth from renewed US trade uncertainty, which could cut fourth-quarter growth to below 1% if the shock persists.
- The economy remains in excess supply, giving the BoC an important reason not to react mechanically to higher headline inflation.
- The key policy test is persistence: temporary energy inflation can be tolerated, but broader and more durable price pressure could require another rate response.
- Macklem therefore kept both directions open—avoiding unnecessary restraint if inflation stays contained, while warning the Bank cannot be “too slow to respond” if inflation spreads.
